Gunboat Diplomacy

Political Bias, Trade Policy, and War

Brendan Cooley

19 January 2019

The Modern Economic Peace, 1870-2014

Why?

Dominant Paradigm: Trade mediates preexisting conflicts of interest

  • Governments value trade, conflict disrupts trade
  • \(\implies\) Commercial peace hypothesis: economic integration reduces war
  • Conflicts of interest: territorial, ideological, etc

Commercial Policy Objectives

  • Governments weakly mercantilistic, desiring
  • Some degree of trade protection at home
  • Trade liberalization or market access abroad

Market Access Externalities

  • Protectionist barriers shift profits from foreign to home firms
  • Thus, trade policy itself generates conflicts of interest between mercantilist governments

Political Bias

Local definition: Degree to which government internalizes narrow (protectionist) interests of firms at the expense of broad (liberal) interests of consumers

  • Grossman and Helpman (1994), Bueno de Mesquita et al (2004)

Regimes and Political Bias

  • Democracies afford consumers access to policymaking process, more liberal trade policy preferences than autocracies (Milner and Kubota 2005)

Argument in Brief: For democracies, liberal preferences \(\implies\) smaller conflicts of interest \(\implies\) fewer wars

  • Additionally, liberal preferences \(\implies\) more trade
  • Spurious correlation between trade and peace

Model Structure

Bargaining Environment

  • Two governments bargain over trade policies, \(\widetilde{\boldsymbol{\tau}} = \left\{ \tau_i, \tau_j \right\}\)
  • “Home” gov \(i\) makes TIOLI offer to “foreign” gov \(j\)
  • Information about \(j\)’s costs of war held privately

\[ \widetilde{\boldsymbol{\tau}}^\star(a_i) = \text{argmax } \widetilde{G}_i \left( \widetilde{\boldsymbol{\tau}}(a_i), \omega^\star(\widetilde{\boldsymbol{\tau}}(a_i) | a_j) | a_i \right) \]
  • Foreign can accept or declare war
    \[ \omega^\star(\widetilde{\boldsymbol{\tau}} | a_j) = \text{argmax } \widetilde{G}_j \left( \widetilde{\boldsymbol{\tau}}, \omega(\widetilde{\boldsymbol{\tau}} | a_j ) \right) \]

Bargaining

International Economy

  • Representative consumer and \(n\) firms in each economy, monopolistic competition

    • Krugman 1980, Venables 1987, Ossa 2012

Economy

Government Preferences I


\[\begin{equation} \label{eq:G} G_i(\tau_i, \tau_j | a_i) = a_i V_i^x(\tau_i) + \Pi_i(\tau_i, \tau_j) + r_i(\tau_i) \end{equation}\]
  • \(V_i^x(\tau_i)\) - consumer welfare
  • \(\Pi_i(\tau_i, \tau_j)\) - firm profits
  • \(r_i(\tau_i)\) - tariff revenue

\(a_i\) is measure of sensitivity to interests of consumers

Assumptions

Government Preferences II

Non-cooperative Equilibrium

Definition

Non-cooperative Equilibrium

Definition

Regime Change and Conflicts of Interest

Optimal Puppet Regimes

  • When a government wins a war, it earns the right to replace the vanquished government with a “puppet” that prefers lower barriers to trade

\[ \max_{a \in (0, \bar{a}]} G_i( \tau_i^\star(a_i), \tau_j^\star(a) | a_i ) \]
  • Losing governments have puppet’s policies imposed on them

Conflicts of Interest

  • Utility difference between (costlessly) winning a war for regime change and being replaced by a puppet

\[\begin{equation} \label{eq:Gamma} \Gamma_i(a_i, a_j) = \overline{G}_i(a_i) - \underline{G}_i(a_i, a_j) \end{equation}\]

Bargaining Environment

Results


Proposition 3: Conflicts of interest smaller for low bias (democratic) governments.

Proposition 4: The probability of war is lower for low bias (democratic) governments.

Proposition 5: Equilibrium trade flows are higher for low bias (democratic) governments.

Conclusion

  • Equilibrium trade policies balance
  • Domestic political interests
  • Foreign military constraints
  • Threat of regime change sufficient to produce changes in policies
  • Shadow of military power in international political economy

Thank You

brendancooley.com

bcooley@princeton.edu

Title Slide Image Credit: Charles Severin (American lithographer, born between 1808-1820; died ca. 1860). 1853 (creation). The American Expedition, The American Expedition, Under Commodore Perry, Landing in Japan, July 14, 1853, Overall view. visual works; prints (visual works); planographic prints; lithographs. https://library.artstor.org/asset/SS35100_35100_35234600

Assumptions

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Non-cooperative Equilibrium

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Bargaining

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International Economy

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